The euro did not cause Europe’s economic crisis; policymakers did. By focusing too much attention on debt, by demanding that existing obligations be met in full (and creditors made whole), and by doing so against a backdrop of coordinated macroeconomic tightening, Europe’s policymakers ensured that the downturn in European macroeconomic performance would be deep, long, and destructive. These same policymakers only narrowly avoided disaster when they began to loosen monetary policy and to accept the need for some debt restructuring. Nevertheless, these efforts did not come soon enough, they were no comprehensive enough, and they were not applied consistently enough to prevent Europe from coming to the edge of disaster as elite macroeconomic ideology finally collided with the requirements for democratic legitimacy in Greece (and Germany) during the summer of 2015. This is the diagnosis Martin Sandbu offers to explain what went wrong.

Sandbu uses his diagnosis to suggest how things could have developed differently. If European policymakers had written down excessive debts aggressively in 2010, they could have avoided much of the need for austerity and deleveraging (or paying down of debts in the private sector) that followed over the next five years. Had Europe’s policymakers embraced a more accommodative monetary policy and placed fewer constraints on fiscal policy, they could have nurtured a sharper and more coherent rebound in economic activity. And had European policymakers paid more attention to productivity rather than focusing so much of relative labor costs (or ‘competitiveness’), they could have put their development models on sounder footing. Clearly this would require a big change in attitudes, particularly for Germany. It would also require that France resume its role as counterpoint to German economic orthodoxy. Sandbu suggests this all might have been more possible (or easier) if the United Kingdom had joined the single currency. The results in terms of European (and British) economic performance would have been far better than insisting on virtues of coordinated discipline (or national autonomy).

The euro as a shared, multinational currency plays only a minor role in Sandbu’s argument. The introduction of the euro was neither necessary nor sufficient for the crisis to come to Europe and it certainly does not explain (or justify) the bad choices European policymakers made. By implication, ‘fixing’ the euro by adding a fiscal union or a political union to underpin the monetary union will not improve the situation. Europe’s economies require better mechanisms for risk-sharing, but they do not have to be so extreme to be effective; a banking union and some mechanism to mutualized restricted amounts of European sovereign debt would probably be sufficient. Ironically, the euro’s supporters seem determined to accept blame for the crisis and to push for an overcomplicated federalist solution. That is why Sandbu calls the book Europe’s orphan — because the euro has been abandoned by its parents in their search for a more perfect union. Since such perfection is neither necessary (in mechanical or institutional terms) nor acceptable in the eyes of public opinion, the euro is branded unfairly as a flawed creation. This not only frees European policymakers from responsibility for their actions but also fuels populist opposition to the European project. Fixing this mess will require political courage and vision in addition to better policymaking.

Sandbu’s argument is well outside the policy consensus. That is only to be expected. Nevertheless it is consistent with a growing sentiment among professional economists that there is something wrong with the official narrative of the European crisis. Europe did not get into trouble because of excessive indebtedness, as the official narrative insists; it got into trouble because of a ‘sudden stop’ in cross-border capital movements. Moreover, as Sandbu rightly points out, this sudden stop affected countries outside as well as inside the single currency. Hence the key to resolving the crisis — and to preventing future outbreaks – is to look for ways to contain or influence the causal mechanism that underlies sudden-stop dynamics. Sandbu offers three solutions: write-downs, capital controls, and eurobonds. The write downs cut into the stocks of cross border exposures before they can be liquidated; the capital controls slow the flow from one country to the next; and the eurobonds channel investor flight to quality into a restricted pool of assets. If European policymakers could couple these instruments to a broader framework to underpin market confidence like that found in early proposals for a European banking union, then it could do much to prevent the financial disintegration that did so much damage during the crisis.

There is significant merit in this argument, particularly as a corrective for current conventional wisdom. In fact, Sandbu’s book is among the best sustained analyses of the crisis that I have ever read. Nevertheless, Sandbu starts the story too late and so misses the crucial link to the functioning of the internal market. His book contains all the necessary elements, from the redistribution of savings through the free movement of capital to the goal of promoting productivity growth through the development of the European periphery. Where it does not go far enough is in acknowledging that there are two sides to every market transaction: money that is borrowed is also lent; assets that are sold are also bought. The power relationships here are asymmetric. Lenders and buyers have the upper hand. This asymmetry is as unavoidable as it is unfortunate. And it explains why Sandbu’s priorities need to be inverted. The first goal for European policymakers should be to maintain the confidence of cross-border investors. Capital controls and write-downs should be a last resort.

The distinction is subtle but important. It explains why Cyprus should never be a model for how to handle a banking crisis in the euro area. It also explains how Greece got into trouble long before November 2009, how Belgium suffered a loss of market confidence and then escaped from a full-blown crisis, and why Italy got into trouble at all. These are elements that Sandbu glosses over in his otherwise excellent analysis. They do not detract from Sandbu’s diagnosis. European policymakers should be held to account for their failures – including the failure to provide both the euro and the wider European project with a more rigorous and coherent defense. What these anomalies or omissions in Sandbu’s argument suggest is that we need to think harder about how to stabilize the functioning of Europe’s internal market and specifically the free movement of capital. Europe’s crisis is about more than just debt.

This book review was originally published in a new journal called Global Affairs. The published version can be accessed here. The first fifty to access this link will get the full PDF version of the published article.